Stock views on NTPC, Aban Offshore, Everest Kanto Cylinder,

CITIGROUP on EVEREST KANTO CYLINDER

EVEREST Kanto Cylinder (EKC) is the largest domestic manufacturer of high-pressure gas cylinders used for storage of industrial gases and CNG. Citigroup believes EKC is uniquely positioned to capture the significant growth potential in India for high-pressure gas cylinders, driven largely by increasing CNG penetration, both in India and abroad. While the CNG segment in India is still at a relatively nascent stage, cost economics, improving refuelling infrastructure, visibility of gas supplies and clarity on regulations should accelerate the trajectory for city gas distribution and consequently, CNG penetration, thereby boosting demand for CNG cylinders. The 12-month target price for EKC of Rs 280, based on 15x September ’09E consolidated earnings — which includes contribution from India, Dubai, US-based CP Industries and the China plant — is in line with the fair value multiple range for its manufacturing/engineering peers in India. Citigroup prefers comparing EKC with capital goods companies that manufacture industrial goods and have a similar growth profile.


EDELWEISS on ABAN OFFSHORE

EDELWEISS initiates coverage on Aban Offshore with a ‘reduce’ recommendation. Day rates for Aban Offshore’s rigs that are on short-term contracts are likely to ease, in line with Edelweiss’ lacklustre jack-up industry outlook. Jack-up day rates are expected to ease 18-19% year-on-year (y-oy) in both CY09E and CY10E and test industry return on average capital employed (RoACE) of 8%. This is based on expectations of a lower jack-up demand (down 14.5% and 5.3% y-o-y in CY09E and CY10E, respectively) and a significant supply coming on stream in CY08-10E. Weak demand is likely due to low commodity prices, revision/deferment of small company and exploratory spend, and weak global outlook. Lacklustre industry outlook, a weak rupee (impacting debt) and short-term contracts/uncontracted Singapore assets are expected to be an overhang on the stock. This renders low fair value of Rs 685. Global drillers’ comparative multiples like EV/EBITDA (at 3.2x two-year forward), price/earnings (at 3.4x two-year forward), and price/book value (at 0.7x two-year forward) have shrunk on the back of low crude prices and economic weakness.


JP MORGAN on NTPC

JP MORGAN upgrades its rating on NTPC to ‘overweight’. The key risks to the target price of Rs 185 include major execution delays and a shortage of coal. NTPC’s size, strong balance sheet and assured-return structure put it in a strong position to achieve its growth plans. JP Morgan advises investors to use share price corrections due to hiccups in execution, if any, to buy the stock, as near-term delays do not affect its valuation much. Apart from execution, customers’ ability to absorb the rise in tariffs and the impact of coal shortages on incentives are the key concerns. With coal prices declining, the cost of debt is the main inflationary factor — power tariff can rise 6-7% per annum if interest costs rise by 500 bps. Access to KG Basin gas is an important potential catalyst to improve gas stations’ PLF and incentives. NTPC is trading at 15.6x FY10 P/E, 2.2x FY10 P/BV and is close to the March ’10 target price of Rs 185. This includes Rs 11/share value for NTPC’s 2 billion tonnes mineable coal reserves. Any positive news flow when coal production commences can improve this valuation. A replacement value-based approach for current capacities suggests a fair value of Rs 140, indicating the market is paying a reasonable premium for 2x capacities in the pipeline.

Karvy Stock Broking views on Everest Kanto Cylinder,

Everest Kanto Cylinder - Target of Rs 215



Karvy Stock Broking has maintained its buy rating on Everest Kanto Cylinder with a target of Rs 215 in its November 26, 2008 research report. "EKC recently announced that they would be setting up a 50:50 JV with M/s. Tomasetto Achilles group, Argentina for carrying on the business of assembling / manufacturing of CNG kits. Currently demand supply scenario for CNG cylinders is favorable. Since CNG is a cleaner fuel, use of CNG as an alternative fuel would continue to receive government support globally. With CNG infrastructure expected to improve in many countries including India and China, demand for CNG cylinders would continue to increase. We expect the company to report robust CAGR earnings growth of 43% over FY08-FY10. So even though we are downgrading our price target, we continue to maintain our BUY rating on the stock," says Karvy's research report.






Great Offshore - Target of Rs 400





Karvy Stock Broking has maintained its buy rating on Great Offshore with a target price of Rs 400 in its November 27, 2008 research report. "At current market price of Rs 257, the stock is trading at 3.8xFY10 and 3.2xFY11 earnings of Rs 67 and Rs 80.1 respectively. The stock is trading at 3xFY10 and 2.4xFY11 on EV/ EBIDTA. We have not factored the upside from acquisition of two companies (KEI) and RSOS which could provide further upside to our valuation. We have assumed convertible bonds as debt (Conversion price of Rs 875 per share), if bonds get converted the equity dilution (2.64 million shares) would decline our earnings and price target by 9%. We have valued the company on earnings multiple considering strong revenue visibility due to long term contracts. We have valued the company at 5x FY11 earnings to capture the impact of the upcoming assets. We maintain BUY with target price of Rs 400," says Karvy's research report.

Karvy Stock Broking views on Everest Kanto Cylinder, Great Offshore

Everest Kanto Cylinder - Target of Rs 215

Karvy Stock Broking has maintained its buy rating on Everest Kanto Cylinder with a target of Rs 215 in its November 26, 2008 research report. "EKC recently announced that they would be setting up a 50:50 JV with M/s. Tomasetto Achilles group, Argentina for carrying on the business of assembling / manufacturing of CNG kits. Currently demand supply scenario for CNG cylinders is favorable. Since CNG is a cleaner fuel, use of CNG as an alternative fuel would continue to receive government support globally. With CNG infrastructure expected to improve in many countries including India and China, demand for CNG cylinders would continue to increase. We expect the company to report robust CAGR earnings growth of 43% over FY08-FY10. So even though we are downgrading our price target, we continue to maintain our BUY rating on the stock," says Karvy's research report.

Great Offshore - Target of Rs 400

Karvy Stock Broking has maintained its buy rating on Great Offshore with a target price of Rs 400 in its November 27, 2008 research report. "At current market price the stock is trading at 3.8xFY10 and 3.2xFY11 earnings of Rs 67 and Rs 80.1 respectively. The stock is trading at 3xFY10 and 2.4xFY11 on EV/ EBIDTA. We have not factored the upside from acquisition of two companies (KEI) and RSOS which could provide further upside to our valuation. We have assumed convertible bonds as debt (Conversion price of Rs 875 per share), if bonds get converted the equity dilution (2.64 million shares) would decline our earnings and price target by 9%. We have valued the company on earnings multiple considering strong revenue visibility due to long term contracts. We have valued the company at 5x FY11 earnings to capture the impact of the upcoming assets. We maintain BUY with target price of Rs 400," says Karvy's research report.

Stock Views on Everest Kanto Cylinder, Amtek Auto, Arvind Mills

CITIGROUP on Everest Kanto Cylinder

CITIGROUP remains positive on Everest Kanto Cylinder (EKC) and has recommended a ‘buy’ rating with a price target of Rs 365 due to its highest leverage to the strong growth that city gas in India is likely to witness over the next few years. EKC is the largest domestic manufacturer of high-pressure gas cylinders used for storage of industrial gases and CNG. EKC’s Q1 FY09 net profit of Rs 35 crore was up 57% year-on-year y-o-y) and well above expectations. The 12-month target price of Rs 365 is based on 19x September ’09E consolidated earnings. Key risks include: 1. Exposure to a single supplier; 2. China — a hitherto unexplored market; 3. Competition — low physical barriers to entry have led to some players entering the market in the recent past; 4. Project risk — EKC is implementing significant expansion plans that are subject to time and cost overruns; 5. CPI — integration and execution risks related to the acquisition of CP Industries; 6. Crude prices.

EDELWEISS on Amtek Auto

EDELWEISS has maintained its ‘accumulate’ rating on Amtek Auto and awaits clear signs of margin improvement. The company has been facing resistance to price revisions from its customers. Over the past three years, the standalone capex was Rs 1,500 crore. The company plans to consolidate its operations now, with incremental capex of only Rs 200 crore over the next two years. This is expected to aid improvement in return ratios, going forward. In addition, the company is looking at inorganic growth opportunities abroad to cement its position in the European and American auto markets. This project is valued at Rs 300 crore, of which, Amtek Auto’s equity contribution will be Rs 75 crore. The joint venture is likely to start operations Q4 FY10E onwards, and is expected to improve the company’s margins, going forward. The merger of group companies and subsidiaries is on track, and is likely to be completed by the end of March ’09. Further, the company is likely to house all its overseas subsidiaries in a Netherlands based holding company to streamline the group structure.

MORGAN Stanley on Arvind Mills

MORGAN Stanley has downgraded Arvind to ‘equal-weight’ and reduced the target price to Rs 34 from Rs 85. It believes that multiple macro headwinds are likely to force Arvind into a loss-making company in FY09. A slowdown in end consumer (US and EU) demand for its denim fabrics business is likely to delay the potential recovery in the denim cycle. A sharp rise in input costs such as cotton, power, fuel and chemicals is likely to impact margins. Huge debt and related financing costs are likely to impact net profit. The company’s forward cover for the dollar at Rs 40 for FY09 is likely to cap the potential benefit due to the current depreciation in the rupee. Although the company is adopting stringent cost-control measures, these may not be sufficient to help it earn a profit in FY09. In the current market environment, investors will be unwilling to pay value for its real estate and joint ventures, which can only be monetised in FY12. The positive catalysts are quick monetisation of its large real estate properties and cost control-driven margin expansion.